Financial firms bear brunt of move; earnings prospects overshadowed
HONG KONG - Bonds of Chinese financial companies have been hit the hardest in the nation's debt market this month, as a surprise interest-rate increase overshadows brighter earnings prospects.
The securities have lost 1.45 percent, the most since the last series of rate boosts in July 2007, according to Bank of America Merrill Lynch's China Corporate Index. Bonds issued by Agricultural Bank of China Ltd, China Minsheng Banking Corp and China Citic Bank Corp handed investors losses of at least 1.9 percent, the worst performances among the top 50 issuers.
"The market hasn't fully recovered from the shock of the latest rate increase," said Liu Xiaochang, a Nanjing-based bond trader at Huatai Securities Co.
"Investors are cautious and trying to steer clear of bank bonds because most of their debt is longer-term and the chances of further rate hikes over the next one to two years are fairly high."
Yields on the securities are about 50 percent higher than the industry average worldwide, as the United States, Europe and Japan keep interest rates at record lows to avert recession. The People's Bank of China, the country's central bank, will raise its benchmark one-year lending rate by at least half a percentage point from 5.56 percent before the end of next year, according to more than half of 17 economists surveyed by Bloomberg on Oct 21.
Prospects for further rate increases jumped after China reported 9.6 percent economic growth for the third quarter and the fastest inflation rate in almost two years.
The performance of the bonds contrasts with bank shares, which rallied on optimism that profits will increase.
"The yields on bank bonds aren't attractive," said Jiang Yongkang, head of fixed-income in Beijing at Yinhua Fund Management Co, which oversees 68 billion yuan ($10.2 billion). "Because there will be more gains in yields and this type of bonds isn't actively traded, we will stand by and watch for some time."
Bank bonds worldwide yield 3.57 percent on average, 1.9 percentage points less than rates on notes issued by Chinese banks, Bank of America data show. The Global Broad Market Financial Index, which tracks bonds issued by lenders including France's Credit Agricole CIB and London-based Barclays Plc, showed a five basis point decline in yields this month.
China's financial institutions issued the least amount of new debt this month since January, with one bond sold, according to data compiled by Bloomberg. China Bohai Bank raised 1 billion yuan of subordinated bonds, Bloomberg data show.
"Investors are still digesting the implications of this rate hike and whether it's a one-off or whether there will be more increases," Shenghua Hu, Citigroup head of markets for China, said in a phone interview from Shanghai. "I wouldn't expect these moves to be sustained in the long-term simply because the Chinese economy is one of the strongest and there's lots of liquidity and people are looking to invest."
China government bonds due in 10 years yield 3.68 percent, compared with 12.2 percent in Brazil, 8.18 percent in India and 7.72 percent in Russia. China yields have surged 35 basis points this month, widening the gap with US Treasuries to about 105 basis points from 82 basis points, data compiled by Bloomberg show. A basis point is 0.01 percentage point.